'Bugged' U.S. Embassy Remains Unresolved Sore Spot : Moscow: Bush hasn't decided what to do. Aides say the matter will be broached with the Soviets.

MOSCOW — It stands in red brick off Tchaikovsky Street, a mute monument to American hubris, Soviet treachery or both. At this juncture in superpower relations, it is a sore point that both countries probably would rather forget.

Don't look for the new U.S. Embassy building to be among the highlights of President Bush's Moscow visit--although he ultimately must decide what to do about it, and White House officials say the matter will be raised with the Soviets.

The eight-story, cubic monolith is a multimillion-dollar relic of the last time that relations between the United States and the Soviet Union were on the upswing, the heady detente days of the 1970s. When then-U.S. Ambassador Malcolm Toon laid the building's cornerstone in 1979, he saw a new "beginning" in U.S.-Soviet ties.

The deal must have seemed so seductive. It was living proof of the new era that--quite wrongly, it turned out--appeared to be dawning between Washington and Moscow. In brief, the Soviets offered to sell the Americans prefabricated modules to guarantee that the new office tower met local building standards. The White House, occupied by Richard M. Nixon at the time the negotiations were under way, pushed the State Department hard to say yes.

The inevitable result, as a former member of the Senate Intelligence Committee later put it, was that the Soviet KGB secret police, in effect, was allowed to become the building's prime contractor.

Confident that they could detect and neutralize whatever Soviet spy masters threw at them, the Americans allowed Soviet workers to build precast concrete pieces for the embassy in their own factories, out of sight of U.S. security experts.

But in 1982, when a U.S. inspection team with experimental X-ray scanners arrived to check what was being built on the 10-acre compound about a mile from the Kremlin, they were flabbergasted by what they found.

Although the U.S. government has never displayed what the inspectors detected, it is widely known that among the spy devices dug out of concrete panels and beams were bugs that normal X-rays couldn't detect and steel reinforcing rods apparently designed to function as antennas.

"We do not yet understand the technology nor the strategy" of some of the spying equipment, former CIA chief and Defense Secretary James R. Schlesinger said later.

In August, 1985, Soviet workers were locked off the construction site. By then, $23 million had been spent and work was about 65% complete on what was to have been the new embassy office building. Other facilities on the walled-in compound, including 134 townhouse apartments for embassy staff, a swimming pool and a bowling alley, were finished and later opened for use.

There was no way U.S. diplomats could use such a severely compromised area as the new tower for their top-secret dealings, so they soldiered on in a grubby, 10-story building 500 yards to the east that has served since the early 1950s as the U.S. Embassy.

An outraged Congress barred Soviet diplomats from using the new Soviet Embassy building that was simultaneously constructed for them in Washington until the dispute about the Moscow facility was settled.

Haggling over the fate of what some have called a "red elephant of the Cold War" could have dragged on interminably. But a fire that destroyed a large part of the old embassy building in March lent the matter a new urgency by forcing U.S. diplomats to set up temporary quarters in the new embassy's underground parking garage, bowling alley and some of the townhouses.

In May, the House voted to toss the question of what to do with the bugged tower into the Bush Administration's lap by authorizing the spending of $130 million in the next fiscal year to provide new office space for U.S. diplomats in Moscow.

Although the Senate has yet to reach a decision, the House's action would leave it to the White House to choose between the options insiders call "tear down" (demolition and replacement of the entire building) and "top hat" (dismantling only the top two floors and adding four new spy-proofed ones).

This time, only U.S. workers and materials would be used.

Soviet officials affect an air of supreme unconcern about the whole business and note that despite the charges of KGB bugging, the Americans have never displayed what they claim to have found.

"If they believe they should tear down the building, that is their own affair," a Foreign Ministry official has said. "We cannot stop the Americans from wasting their money."